A good beginning…
In the beginning was the word: to startup. And the word was in San Jose (Silicon Valley).
From there, in the not too distant 1972, a way of doing startups spread that was exported all over the world and took various forms, depending on the geography where it landed. Not least because the original one has so far proved unreplicable in any other part of the terraqueous globe (but that is another story).
Regardless of where a startup is launched, though, one constant exists: the need for liquidity to start a business. And in this, if you do not have your own means, investors play a crucial role. Below is my very personal perception of the Italian situation (and of half of Europe).
“Show me the money”
Funding dedicated to startups usually generates positive externalities and is set to do so more and more in the future. Among the fundamental actors in sustaining and developing startups we find Venture Capital funds, and Corporate Venture Capital funds too (created inside industrial incumbents). No offence to the legendary Family, Friends & Fools, whom I greet with the utmost affection, but reading on you will understand why you are not the protagonists of this post (we love you dearly all the same!).
Returning to Ventures (or VCs), then, we often refer to them as indispensable players in a startup’s growth and evolution. When they come in, they often bring order and discipline where these are missing or insufficient (that is, practically always). Often it is important to have a VC in the cap table if only to show the investors of subsequent rounds that the situation is already under control.
Are all Ventures the same?
No, but I do not even want to step into an arena I personally do not know in detail. What I do know, however, is that I have often met VCs with a very precise business model and consequent mindset, which I roughly summarise like this:
They usually do not do (very) early stage. Because there you find startups that are still not solid and without traction, with a consequent (very) high probability of losing what has been invested;
Only startups where the founder controls the initiative. Even outside early stage, the human factor remains an indispensable driver for scaling, so the Venture wants to see a track record and full commitment;
Only startups with a disruptive growth path. Since the VC invests in high-risk initiatives, it needs to balance the fund: it knows that the vast majority of the startups it invests in will not deliver adequate returns, so it will have to find at least one initiative that grows enough to let it realise a hypothetical double-digit multiple, covering the hypothetical other “failures” or under-performers.
Obviously, by citing only the points above I am leaving out a great many others, which are not functional to the reasoning that follows. If anyone wants to dig deeper into Venture Capital logic, though, I warmly recommend following, among others, the Silicon Valley Dojo blog (curated by the founders of Lombard Street) and studying carefully Seraf’s practical guide (produced by Launchpad Venture Group).
A different Venture is possible
Are we together so far? VCs are essential players, investing high-risk capital to support innovative initiatives, carried forward by visionaries who often have everything to prove and who must grow at least 200% year on year, possibly dropping everything at some point and moving to Silicon Valley.
Besides, for those who want safe returns there are always Bonds (mind the currency risk) and Italian government bonds, but for some reason LPs do not like those 🙂
So Ventures try to contain risk by giving themselves a discipline and setting the boundaries listed above. But are we sure this path is the ideal one for every startup? Are founders to be discarded if they are not Elon Musk? Are startups zombies if they do not become Uber? Do the LPs who invest really care to know there is a unicorn in the fund? Must we really resign ourselves, as a system, to the idea that startups need to be pumped full of liquidity, reading about million-euro funding rounds and billion-euro valuations, only to discover that many unicorns too end up in the graveyard?
I and all of Startup Bakery think not. Above all not in the Italian economic system, extended to much of the old continent. That is why with our Startup Studio (or Venture Builder) we have set up a different path, not exclusively financial but industrially driven.
Careful, this does not mean our Venture path is better or worse than the classic one, only that it is an alternative path, one that many potential investors, founders and companies can look at with curiosity and even with favour.
So, what changes?
Fundamentally, what changes is that the startups (the underlying assets) are created and financed by us in the startup studio. From scratch. But without reinventing the wheel every time. This allows us to cyclically increase the average quality, solidity and sustainability of the startups we spin up and, as a consequence, to have no need to go breathlessly hunting for unicorns around the world in order to realise interesting multiples.
We, as a Venture Builder, inject 100k at pre-seed and 200k at seed into every startup we spin up. A lot? A little? I don’t know. To us today it seems right and, moreover, in Italy we would like more company, because by definition the Startup Studio operates on contained volumes (relative to the capital raised). What we expect, though, is to hand the startups we spin up to selected industrial partners at average values between 6 and 20 million euros (at 2 and 5 years respectively).
By doing so:
For investors, potential double-digit multiples are generated with startup capitalisation values at least an order of magnitude lower than those needed by “traditional” startups;
Industry is offered the possibility of acquiring (when not creating) innovation at contained values and of avoiding the hidden costs typical of integrating startups (everyone has known each other from the start);
The startup is offered a concrete acceleration path, sponsored by one or more industrial partners (with the right mindset) and led by a co-founder who has in the meantime fully learned, on the job, the logic of doing business.
So, in short, we believe in what we invest in, because we do it with our own hands and because each startup’s target believes in it, first placing pre-orders and then subscribing to our SaaS, thereby validating each business idea and creating that long-sought traction.
But it is at series A that the knots come to the comb.
Series A: who’s passing me the ladder?
At this point, a VC starts looking at the startup (possibly with the sceptical gaze and raised eyebrow of a Spartan veteran waiting from the top of a cliff to see which recruit will show up before him). If it decides to enter the cap table, it usually demands that the cap table, even after its entry, still be in the founders’ hands, and that they, with the money raised at series A, must scale (the cliff was just for the warm-up) and face the subsequent rounds B, C, D, E, and so on and so forth.
However, looking more closely at the cap table, there is a type of co-founder the VC rarely sees: the Startup Studio! This one seems to have convinced its partner to found in a minority position, or in any case to follow a path quite different from the standard. Moreover, this new path, in which the startup is handed to an industrial partner at values around 15-20 million, does not let the traditional Venture realise its target multiples. Not even one of the 3 conditions listed as important for a VC is met.
So how can one proceed?
In search of the lost multiple
As in the best stories, it is precisely when all seems lost that the plot twist arrives and turns the protagonists’ fortunes around. The two Ventures (Capitalist and Builder) are destined to meet!
A VC could start by checking the other initiatives in the Startup Studio’s basket. Oh yes, because if it is true that the single initiative does not even remotely resemble a fully fledged unicorn, widening the gaze to the Startup Studio’s other startups you realise they are all created on the same solid foundations and therefore all have a higher probability of generating exits, even if more contained than the “standard”.
The two types of Venture (Capital and Builder) must get to know each other and meet more and more, to find common ground, perhaps starting here:
The Startup Studio is a guarantor of the startups’ quality, because it makes (early stage too) investments more serene;
The Startup Studio is a co-founder that, beyond spinning up startups, spins up entrepreneurs. At Startup Bakery we are the ones who stand the company up. It would therefore be strange for a third-party co-founder to own the majority of it. What happens is that, within 12 months at most, the chosen co-founder becomes fully able to lead the initiative, but always with us alongside, even after a partial exit!
The Startup Studio and the co-founder hand stakes to a selected industrial partner, which guarantees the startup’s growth and not its suffocation. By now, in Italy too, companies have clearly understood that it does not pay to “absorb” but to “include”, leaving the startup broad independence (perhaps created within a Corporate Venture Building programme).
There are obviously many other differences in doing a startup inside a startup studio, but for the more daring VCs who have read this far, I have one word: thank you!
In conclusion
For once, Italy can exploit its industrial traction to do innovation, preventing initiatives born here from being forced to emigrate, following the perverse mechanism of classic funding and ultimately carrying value (read GDP) elsewhere.
Our home-grown Venture scene (hopefully European) has the chance to become a true “System”: different, alternative, but just as effective as the one born in San Jose, in the not too distant 1972.
We are here.